How to calculate mutual funds returns yourself

Mutual funds are a collective scheme of investment, which pools money to buy securities from investors. Although there is no legal definition, mutual fund is a common term applied to the investment vehicles that regulate the sales of the funds to the public.

Mutual funds are often open ended. It means the investors or stockholders have the option to buy and sell shares of the funds at any time. Mutual funds have both advantages and disadvantages when compared with individual securities.

Understanding mutual funds is important for any investor. Unlike the stock prices that depend on the supply and demand curve, the mutual fund pricing takes place at one time during the day, mostly during the end of the day.

How to calculate mutual fund returns

Calculating mutual funds returns is important, as millions of people invest to gain a significant profit within a short period. The return on the investment of the mutual fund for a given time is the capital increase and generated income divided by the total investment amount.

The value is a percentage and the entire calculation results in the total return.Unfortunately, many investors in a mutual fund do not understand the importance of the total return. There is always confusion between the net asset value, yield and capital gains.

Hence, it is easy to rely on the total return. A better understanding on the achievement of the mutual funds will measure the required investment process for an individual and investor.

Usually, investors calculate the average annual return of the fund, which is the arithmetic mean of the total returns earned over a particular period. However, most investors misuse the indicator to display unrealistic returns to lure new investors.

For example, an individual invested Rs. 1 Lakh in a mutual fund. The first-year records a growth of 100% and the second year marks a drop of 50%. At the completion of two years, the investor did not receive any gain. However, by adopting the average annual return, the investor receives a return of 25%.

The end calculation is often intimidating. Nonetheless, calculating the individual growth for the stated period is necessary to access the overall outcome of the return on mutual funds.

The above table provides information on the invested amount and the return on the mutual fund. It is usual for the market to express loss or gain as a percentage. Absolute return is the term referred to the reflection of the percentage in the portfolio.

The above table follows the calculation of the difference between the current price and cost price, divided by the cost value. Although it returns a figure of 64.14%, one should look at the time taken to earn, which is more than a year. If the holding of the mutual fund is over a year, it is crucial to calculate the compounded annual growth rate (CAGR).

The compounded annual growth rate calculates the year-on-year returns. It further gives a better picture about the growth and fall of the mutual fund price. The formula for calculating CAGR is [(F/S) ^ (1/n)]-1, where F = Final value, S = Initial Value and n = holding period. Consider the following table:

The compounded annual growth is at 22.65%. According to this, there was a reinvestment of the returns every year. Calculating mutual funds returns annually gives a better picture rather than considering the entire outcome. It is because of the arithmetic mean adopted by the fund management authorities to attract new investors.

According to the calculation, the investment increased to Rs. 122,646 in the first year, Rs. 150,422 in the second year and Rs. 164,136 in the third year. However, this is not correct. The return on the mutual fund may have increased drastically in one period and fallen in the other.

However, the CAGR displays a different picture as it calculates the overall returns without considering the instability occurred in the holding period. Nonetheless, the value provides the chance to compare it with other funds.

In another scenario, where the calculation of cash flow is important, adoption of XIRR calculation takes place. XIRR gives a detailed report of the inflow timing and CAGR. Calculating the XIRR is helpful for mutual funds that follow the SIPs or Systematic Investment Plan.

For example, in the table above the XIRR is 25.25%. However, investors calculate the return on the investment as 13.33%. The interpretation is wrong, as the method does not include the different times of cash inflow. Furthermore, there are several cases where there is reinvestment of the return after first year. Moreover, the rate are fluctuating and do not remain constant either.

Calculating the return on the mutual fund depends on the holding period. If the period is more than one year, it is essential to choose the compound annual growth rate and XIRR. However, if the period is one year, choosing the quoted returns is the best choice. It is because the annual return uses the annual calculation.

Understanding absolute and relative return of mutual funds

The common entity to measure the performance of a mutual fund is its absolute return. However, it provides only half the entire story of the funds. It is important to obtain the answer in both the relative and absolute terminology.

Absolute returns:

The calculation of the absolute return is direct, expressed in percentage and uses the following formula:

Let us say, an investor invested Rs. 50,000, which grew to Rs. 75,000 after two years. Using the above formula, we get:

Absolute return = (75,000 – 50,000)/50,000 = 0.50 or 50%

If the division is for individual holding periods, then the absolute return is 25% per annum.

Relative Returns:

Relative returns offer analysis of the invested amount and its performance relative to a stated benchmark. For example, an investor has the option to compare a domestic mutual fund with that of index fund to obtain a better understanding about the functioning. However, calculating relative return is a bit complex due to the presence of the benchmark.

The above formula provides an insight into several factors and the relationship between the two measuring units.

For example, let us say the absolute return of the benchmark is 10%. By using the above example and its values, we get:

Absolute return on the investment = 50%

Absolute return on the benchmark = 10%

Relative return = 50% – 10% = 40%

Again, if the investor wishes to have a year-on-year calculation, he/she can divide the return by the number of years. In the above case, the relative return is 20% per annum. In investment terminology, the fund outclassed the benchmark by 20%.

Mutual funds are attractive, although they are subject to the market conditions. Calculating mutual funds returns and comparing it using proper measuring tools will help the investor choose the best option to invest in mutual funds.

The above-mentioned opinion offers insight into the two different concepts. In the end, it is the choice of the investor to choose an appropriate concept, based on their investment-holding period. Hope calculate mutual funds returns helped you. Voice your opinion below if this post was useful.

About parsha

I'm Parani Dharan and my passion includes investing, finance, Gaming. I also love writing for this blog which was started initially to answer his family/friends. I've successfully tried entrepreneurship, used to work in the professional financial industry but now work for a cool IT firm out of Dubai & US.

Comments

Calculating the return on the mutual fund depends on the holding period. If the period is more than one year, it is essential to choose the compound annual growth rate and XIRR. However, if the period is one year, choosing the quoted returns is the best choice. It is because the annual return uses the annual calculation.

please list formula for calculating rate of interest a MF is giving in following cases :

1) how to calculate quoted returns for 1 year of investment (open ended MF)
2) CAGR and XIRR formulae for 3 years of investment ( under 80c)

with meaning of all relevant terms used in the formula and probably with one example.

Can you tell me how to calculate benchmark return & actual return for a set of mutual funds? For e.g. Lets say I have added 5 different funds in a portfolio called Portfolio A. I want to calculate the benchmark & actual return for Portfolio A. What is the formula to calculate this?

I have invested in 3 elss schemes since June10 2015 for an amount of Rs1000 for each scheme monthly. Please advice if I can continue with these or if I need to increase the investment amount . Also please advice alternate best investment options. Can I also invest in Stocks directly? I can shell out an extra 10000 per month for other best investment avenues.

I have Sip of 2000 in Franklin Templeton prima growth plus for 1 yr. Just need clarification on the investment period. Should I increase my period of investment for long term.
Also tell me something about Franklin Templeton prima growth plus fund and their returns and performance of the fund

SIR I INVEST 25000 ANNUAL PREMIUM FOR 4 YEARS IN SUD LIFE .NOW I WANT TO CHECK THE CURRENT VALUE OF MY INVESTMENT IN MUTUAL FUND .HOW WE GET TO KNOW OUR CURRENT FUND VALUE TILL NOW.HOW WE CAN CALCULATE AND ON WHAT PARAMETERS FINAL FUND VALUE WILL DECIDED.WHETHER IT IS VERY RISKY TO INVEST AMOUNT IN MUTUAL FUND..

I am 45 year old and i want to invest around 20k through SIP every month in mutual fund with atleast 5 years time frame. can u suggest me some good fund in which i should invest. my risk taking ablity is more as I am financially sound.

I am Dipak 31 year old and working in PSB.
I am investing in Reliance tax saver (since 2012) and axis long term equity (since 2015) through SIP of Rs. 1000/- in each ELSS. Duration for reliance is 15 years and for axis is 10 years.. Now I want to add 2 more SIP for 5 – 6 years of Rs. 1000/- each. Please suggest suitable SIPs for ELSS..

hi, my self sanjay, I have Reliance Equity Opportunity fund-Gr and investing since 2012, however fund is not performing as compare to other funds i have, Please suggest, whether i should continue investing in this fund or stop. My plan is to continue investment for next 10 years. Please advise.

There is no guarantee that it will double but the probability is there in my opinion to get close to that. There are no guarantees in financial markets. Note that balanced fund may not offer the return you seek as they take less risk.

For this you need to be bit aggressive – look at HDFC Mid CAp fund, Franklin Prima Plus, ICICI Blue Chip, Quantum Long Term Equity etc.,

HELLO I HAVE A DOUBT ..SUPPOSE I INVEST IN FD EG 1000 RS FOR 10% PA INTEREST RATE..I GET 1100 AT THE END OF ONE YEAR LATER.. I GET INTEREST ON 1100 FOR 2ND YEAR..THAT IS PURE COMPOUNDING…SAME I HEAR ABOUT MUTUAL FUND SAYING RETURN OF LAST 5 YEARS IS SUPPOSE 1ST YEAR 10%..2ND YEAR 18% .. HOW DO I SEE MY RETURN..???? 1000…10% SO 1100 FOR FIRST YEAR AND THEN 1298(1100*18%) FOR 2ND YEAR AND SO ON.. OR JUST 1180..?????

No . Mutual funds calculate annualized return from date of screening you selected. For ex., you select 5 years, then they will calculate return from March 2011 NAV value and what it is today to arrive at annualized return.

Sir,
I am a newbies to MF/SIP my age is 27. I want to invest Rs.2000 per month in SIP for 3 year tenure as an kickstart on a good performing MF for good return benefits. Please advise Least 3 Good Option. Which would be suitable for me.

Sir,
I am investing Rs.1000 per month in AXIS EQUITY GROWTH fund -G , Rs.1000 per month in AXIS LONG TERM FUND (G),Rs,1000 per month in ICICI VALUE DISCOVERY FUND -G AND Rs.300 PER WEEK (monthly Rs.1000)RELIANCE SMALL CAP FUND (G) for last 2 years. Can i continue these fund or change to another
fund. This is for my Child education purpose and my retirement purpose. My child age is 4 year and my age is 34 years. Pls guide to me for better result. i can able to invest additional Rs.1000 every month.

Hope you have used PPF as well. These are good funds as of data available today. If you want to reduce risk, you can shift from Small Cap fund as it adds more risk for higher returns. Your option though. You can add the extra 1000 in Axis Long Term Equity

Sir,
I am investing Rs.2500 per month in HDFC Mid Cap fund -G and Rs.1000 per month in Franklin Templeton High Growth companies -G for last 2 years. Can i continue these fund or change to another
fund. This is for my Child education purpose and my retirement purpose. My child age is 1 year and my age is 34 years. Pls guide to me for better result. i can able to invest additional Rs.1000 every month.